S corporation receives late QSub election relief

Plain-English summary

An S corporation indirectly owned a subsidiary through another wholly owned subsidiary and intended to treat the lower-tier company as a qualified subchapter S subsidiary. It failed to file Form 8869 on time but represented that its returns had consistently treated the company as a QSub. The IRS found the regulatory-extension requirements satisfied and granted 120 days to file the election. The ruling did not decide whether the parent was a valid S corporation or whether the subsidiary otherwise qualified as a QSub.

Ruling snapshot

• Question: May the S corporation file a late QSub election for its lower-tier subsidiary?
• Outcome: approved; a 120-day extension was granted
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 1.1361-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201701013
Third Party Communication: None
Release Date: 1/6/2017
Date of Communication: Not Applicable
Index Number: 1361.05-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:03
PLR-124088-16
Date:
September 29, 2016

LEGEND

X = ------------------------------------------------------------------------------------------------------
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Sub1 = ------------------------------------------------------------------------------------------------------
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Sub2 = ------------------------------------------------------------------------------------------------------
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State = --------------

D1 = ----------------------------

D2 = ----------------------

Dear ---------------:

This letter responds to a letter dated August 2, 2016, submitted on behalf of X by its authorized representative, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations for X to elect to treat Sub2 as a qualified subchapter S subsidiary (“QSub”) under § 1361(b)(3) of the internal Revenue Code (Code).
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FACTS

The information submitted discloses that X was formed under the laws of State on D1 and elected to be an S corporation effective D2. X wholly owns Sub1, which wholly owns Sub2. X represents that it intended to elect to treat Sub2 as a QSub effective D2. However, X failed to timely file Form 8869, Qualified Subchapter S Subsidiary Election, for Sub2. X represents that it has filed its tax returns for all of the relevant tax years consistent with Sub2 being a QSub since D2.

LAW AND ANALYSIS

Section 1361(b)(3)(A) provides that except as provided in regulations prescribed by the Secretary, for purposes of Title 26, (i) a corporation that is a QSub shall not be treated as a separate corporation, and (ii) all assets, liabilities, and items of income, deduction, and credit of a QSub shall be treated as assets, liabilities, and such items (as the case may be) of the S corporation.

Section 1361(b)(3)(B) defines the term “qualified subchapter S subsidiary” as a domestic corporation that is not an ineligible corporation (as defined in § 1361(b)(2)), if 100 percent of the stock of the corporation is held by an S corporation, and the S corporation elects to treat the corporation as a QSub.

Section 1.1361-3(a) of the Income Tax Regulations provides the time and manner of making a QSub election. A taxpayer makes a QSub election for a subsidiary by filing Form 8869 with the appropriate service center.

Section 1.1361-3(a)(4) provides that a QSub election cannot be effective more than two months and 15 days prior to the date of filing.

Section 1.1361-3(a)(6) provides that an extension of time to make a QSub election may be available under §§ 301.9100-1 and 301.9100-3.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code (Code) except subtitles E, G, H, and I. Section 301.9100-1(b) provides that the term “regulatory election” includes an election whose due date is prescribed by a regulation published in the Federal Register.
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Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for regulatory elections that do not meet the requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be granted when the taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

CONCLUSION

Based on the facts and representations submitted, we conclude that the requirements of § 301.9100-3 have been satisfied. Accordingly, X is granted an extension of time of one hundred twenty (120) days from the date of this letter to elect to treat Sub2 as a QSub, effective D1. The election should be made for Sub2 by filing Form 8869 with the appropriate service center, with a copy of this letter attached. A copy is enclosed for that purpose.

Except for the specific ruling above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion concerning whether X is a valid S corporation or whether Sub2 is eligible to be a QSub.

This ruling is directed only to the taxpayer requesting it. According to § 6110(k)(3) of the Code, this ruling may not be used or cited as precedent.

Under a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representative.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed
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by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: _____
Bradford Poston
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2):
Copy of this letter
Copy for § 6110 purposes

cc: